November 2, 2008 / 4:29 PM / 10 years ago

RPT-IPO VIEW-U.S. biotech IPOs dying on the vine

(Repeating item that initially moved on Friday)

By Phil Wahba

NEW YORK, Nov 2 (Reuters) - While the market for initial public offerings has virtually shut down in all industries, with no deals in the United States in nearly three months, biotechnology companies desperate for capital will likely be waiting in line far longer than others when it does reopen.

Once an industry coveted by investors, biotech has not seen an IPO since November 2007, when Nanosphere Inc NSPH.O, which develops diagnostic tests, made its $113 million debut at the bottom of its price range. Since then, it is down 68 percent, compared with just a 16 percent drop in the sector, as measured by the Nasdaq Biotech index .NBI.

Others waiting in the wings are throwing in the towel. In the last two weeks, nearly half of the biotech companies in the IPO pipeline have dropped out.

They include drug delivery company CyDex Pharmaceuticals Inc, which pulled its filing on Tuesday, along with Xanodyne Pharmaceuticals, which focuses pain management, and Phenomix Corp, which specializes in diabetes treatments, with both withdrawing last week.

“We’re in a period where small cap names are not attractive,” said Eric Schmidt, a biotechnology analyst at Cowen and Co.

Paradoxically, Schmidt said, many already public, larger biotech companies are attracting investors because they are “defensive” stocks, with revenues resilient in downturns — and, in contrast to many big mainstream pharmaceuticals, no looming patent expirations.

“We’re not looking at any revenue cliffs in five years,” Schmidt said.

Five biotech companies remain in the pipeline, with deals totaling $330.5 million, according to Thomson Reuters data.

Among them are Omeros Corp, which works on central nervous system disorders and hopes to raise $115 million, and genomics analysis company BioTrove Inc, aiming for a $75 million IPO.

But as biotech companies have been snubbed by the capital markets, they have proven to be tantalizing, often willing, targets for big pharmaceuticals companies eager to replenish their drug pipelines.

Last week, GlaxoSmithKline Plc (GSK.L) purchased Genelabs Technologies, which develops therapies against hepatitis C, for $57 million.

Swiss drugmaker Roche Holding AG ROG.VX is trying to buy the shares in Genentech Inc DNA.N it does not already own for $43.7 billion, while Eli Lilly & Co (LLY.N) recently acquired ImClone Systems Inc IMCL.O for $6.5 billion.

But that enthusiasm only extends to biotech companies with products ready for sale.

“Pharma is not interested in funding five years of research,” Schmidt said.

“No one is looking for another Phase 1 or Phase 2 stage company,” he added. “And since no one is looking for those companies, there won’t be any IPO’s either.”


When the spigot does reopen, biotech companies with marketable therapies for hepatitis C, cancer and Alzheimer’s therapies have the best prospects, analysts said.

“The nearer to market, the better, and the less capital required beyond an IPO the better,” Schmidt said.

Demographic trends could improve biotech’s longer-term prospects.

“Biotechs offer a glimmer of hope to deal with the array of illnesses our aging population will be facing,” said Steve Brozak, an analyst with WBB Securities LLC.

Brozak predicts the next wave of IPOs will come from spinoffs of current biopharmaceutical companies that can tap into their parents’ resources.

But even if the market for IPOs did reopen soon, biotech companies might have to wait longer than their peers.

“Institutions are now looking at buying assets, not concepts,” said Tim Monfort, head of equity capital markets at investment bank Jefferies and Co Inc.

“Most biotechs are largely selling early-stage concepts,” he said, making it likely they will not be appealing to investors for a while yet.

The greatest threat to the return of biotech IPOs is the nearly universally poor performance of biotech stocks, analysts said, despite biotech once being the hottest sector.

“There have been IPO windows, when investors got very bullish on biotech and there was a lot of irrational exuberance,” said Guatam Jaggi, managing editor of consulting firm Ernst & Young’s annual biotechnology report.

One such period was in 2000, after the human genome project was completed, and there were 22 biotech IPOs. But in 2001, the market cooled, and there was only one biotech deal.

“People realized it would take much longer to develop drugs than they thought and they rushed out of biotech,” Jaggi said.

Only seven of the 61 biotech companies to have gone public since 2000 are currently trading above their IPO prices.

“Until people start making some money on these stocks, I don’t see much interest in IPOs,” Schmidt said. (Additional reporting by Toni Clarke in Boston, editing by Gerald E. McCormick and Maureen Bavdek)

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